'Corporate bonds will be a rewarding asset class in 2009'

Corporate bonds are likely to be a rewarding asset class in 2009, according to wealth manager HFM Columbus.

The Bank of England base rate is tipped to tumble to around 1pc before the end of March 2009 and the disastrous effect this is having on savers’ deposit rates has become horribly apparent.

“We think that income-paying vehicles are likely to be the big story in the coming year,” said HFM Columbus investment director Rob Pemberton. Credit markets are currently offering investors an attractive investment opportunity with spreads over government bonds at unprecedented levels following the crisis of confidence in the market.

“Investment grade spreads are at their widest since the 1930s and twice the level of the dot.com bust of 2002, and high yield spreads are significantly greater – in our view it is an excellent time to get into these funds. The current distribution yields on corporate bond funds are typically between 5pc and 8pc with gross redemption yields higher still.”

So which funds does Pemberton currently tip?

“We like the M&G Corporate Bond fund, managed by Richard Woolnough. He is one the UK’s leading fixed interest managers, with a very good track record,” he said. “The fund invests predominantly in investment grade bonds issued by established companies like telecom firms, energy utilities and major retailers, but may hold some gilts.

“Some attractive opportunities are now presenting themselves in lower rated bonds and Richard has begun to reduce the fund’s underweight position in ‘BBB’ rated investment grade corporate bonds.”

The M&G Corporate Bond Fund has outperformed its sector average, the IMA Corporate Bond Sector, by 7.1pc over one year to the end of November 2008 (returning -3.8pc) and 9.6pc over 3 years (returning -1.6pc).

“It is important to understand the risk element inherent in corporate bonds,” he says. “Investing in them is a straightforward businesses as you are essentially asking just two questions – will I get my money back and what rate of interest am I being paid. The greater the risk of not being re-paid then the higher will be the income yield.

“We are well aware that the company default rate will rise appreciably over the next few years,” he added. “However, the level of pessimism is extreme. The market is currently assuming that more than one in four investment grade bonds will default over the next five years, way higher than any level we’ve seen before.

“These are very difficult times, but surely not as bad as this default rate implies, and we feel confident to recommend corporate bonds as a key part of any income seeking investor’s portfolio in 2009.”